The move to put Australian monetary policy on more normal settings prompted the kiwi dollar to fall against its trans-Tasman counterpart.

Stevens lifted his benchmark interest rate to 4.25%, saying it is “appropriate for interest rates to be closer to average” as inflation and economic growth move back to more normal trends.

The kiwi dollar dropped to 76.25 Australian cents from 76.41 cents immediately before the announcement.

Today’s hike takes the interest rate differential between the trans-Tasman nations to its widest gap in Australia’s favour at 175 basis points.

With the Reserve Bank of New Zealand not pegged to begin hiking rates for at least another couple of months, this could get wider if the RBA goes again next month.

“With the risk of serious economic contraction in Australia having passed some time ago, the board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” Stevens said.

The RBA embarked on its tightening regime last year after Australia’s economy avoided falling into recession amid ongoing demand from China for its resources.

Markets have priced in 175 basis points of hikes by the RBNZ over the coming year, according to the Overnight Index Swap curve.

The RBNZ has indicated it may move on the Official Cash Rate as early as June. However, New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said yesterday that a rate hike may be postponed till September, based on evidence of an unusually weak and shallow economic recovery.

Businesswire.co.nz